1. RFG welcomes this enquiry at a time of
further change and uncertainty in the industry. It is also an
appropriate time to take stock of what has been achieved in the
last five years following the privatisation and restructuring
of the industry.

2. In this period, passenger traffic has
grown by about 30 per cent and freight traffic by some 35 per
cent. There is little doubt that passenger and freight service
quality has generally improved, but so have peoples' expectations.
Service quality for freight is, in any case, measured against
the main competition, road.

3. During these last five years, the freight
train operators have invested about £1bn in rolling stock,
other equipment and services, and the new locomotives and wagons
are bringing a much a needed step change in reliability.

4. New services have been developed for
rail freight in markets such as food and drink, mail and parcels,
waste disposal and general manufactured goods, as well as expanding
existing services such as coal, steel, aggregates and other building
materials. Deep-sea containers form an increasing number of trains
from our major ports.

5. The problem now is that the rail network
has become congested, with both passenger and freight trains taking
up the slack in the system inherited from BR. It is also evident
that those who set up the structure of the railway at privatisation
did not expect traffic growth; rather a continuing steady decline,
certainly in the case of freight.

RAILTRACK

Background

6. Railtrack was part of this expectation
of decline, and negotiated a contract with EWS Railway for track
access in which Railtrack's income per train mile would increase
as traffic declined, but would decrease with growth. Sadly for
Railtrack, freight traffic grew.

7. Railtrack was set up to manage the rail
infrastructure, bring much needed private sector investment into
it, renew worn out equipment and, where necessary enhance the
network to meet the reasonable requirements of its customers.
Some investment has taken place, especially when it was negotiated
as part of a franchise agreement, but very little of this is for
the use of freight.

8. Much of the last five years has been
wasted in arguments between Railtrack, the rest of the industry
and the Regulator about whether enhancements were necessary and,
if so, who will pay. This has, of course, achieved what many see
as one of Railtrack's objectivesto delay expenditure for
as long as possible.

Maintenance and renewals

9. The Rail Regulator has reported on Railtrack's
maintenance and renewal programme. Unfortunately, the regulatory
action has, as the NAO Report demonstrated, been hampered by lack
of information and targets. The general conclusion is however
clearthat maintenance and renewals have not been sufficient
and that the network is deteriorating at a time when traffic is
increasing.

10. Railtrack has lost several years before
starting to introduce modern track and ballast equipment, continuing
to use very out-dated labour intensive methods which cause lines
to be closed for much longer periods and undoubtedly cost much
more in the long term than if modern equipment were used.

11. Similar comments can be applied to Railtrack's
signalling policy which has ranged over the space of little more
than a year from feast to famine. At one moment, there was so
much signalling work required that design was being subcontracted
to Australia; only a year or so later, signalling engineers were
being laid off in the UK due to lack of work from Railtrack.

12. The sad saga of the West Coast Main
Line signalling demonstrates a degree of technical incompetence
which is now reflected in a cost overrun of nearly £4 billion
on a project originally costed at around £2 billion. Since
this work is to be undertaken under a contract between Railtrack
and Virgin to which the Regular attached enforceable conditions
requiring Railtrack to deliver the 42 additional trains paths
it promised, we question why any of the cost of this project should
fall to the public purse.

Asset register

13. Alongside all this, it is only in the
last year that the sSRA and Rail Regulator have instructed Railtrack
to prepare an asset register. This should of course have been
done five years ago. Without such detailed knowledge of how big,
how wide, how high structures are and what clearance are available,
the type of signalling and platform dimensions (to name but a
few), it is difficult to get at firm costs for enhancements.

14. There is also the question of public
access to the Register, and into what detail it goes. We are pleased
that the Regulator has said that the Register must be published
but, if Railtrack restrict access to some information to itself,
then it has control of the information on which others may be
able to offer alternative and cheaper solutions.

15. An example of this is the proposed upgrade
of the West Coast Main Line for piggyback gauge where several
Rail Freight Group members have suggested solutions which would
save about £100m in compensation to trains operators by doing
the work at night while allowing the trains to operate at line
speed during the day. This compared with Railtrack's statement
that it would be necessary to close the whole line south of Rugby
for six months. The technology proposed by RFG members is not
new; it was used to increase the bore of the London Underground
Northern Line in the 1930's.

16. We have been trying for the last year
to get technical information from Railtrack on some representative
tunnels on the WCML so that the proposals can be worked up in
detail. This has not been refused; it has just not been provided.

17. This demonstrates the need for Railtrack
to make available full details of the assets it owns. We would
argue that, since Railtrack has a duty to operate efficiently
and since many enhancement projects will be funded by outside
agencies, mostly the Government, although Railtrack will presumably
still be operator of the infrastructure and holder of its safety
case, it cannot expect to be sole contractor, nor expect to be
paid a price for a scope of work which is not subject to question,
audit or competition.

18. There is the further point that, as
in the BR era, if BR did not want to do particular works, it quoted
a price so high that nobody would take it forward. This same attitude
still appears to be around in Railtrack and, we believe, applied
to the piggyback gauge upgrade. Railtrack does not want to do
it, even if the work is done at no cost to Railtrack. Hence the
importance of their asset register and technical details being
available in full for outside scrutiny and use.

Railtrack's future project management ability

19. BR did very little new works, the last
major one being the East Coast Main Line electrification. It therefore
had little need of project management skills and, although Railtrack
has taken some steps to bring in new skills, its performance on
the West Coast Main Line upgrade shows how far they have to go
even on one project. We agree with sSRA Chairman Sir Alastair
Morton, who has stated that Railtrack will need to have upto 20
major projects going at once if it is to meet the future needs
of customers; it has put most of its best management into the
WCML and hired external projects managers. How will it cope with
the other 19 projects?

20. We believe that the only solution is
for Railtrack to accept outside project management alongside outside
funding for major and possible minor enhancements. The company
must be prepared to restrict its involvement to outputs, operational
and safety matters. How the outputs are achieved, provided that
they are done safely, in line with standards and operational requirements,
should be left to others.

Funding

21. Finally, there should be much more clarity
about what happens to funding paid to Railtrack for enhancements.
Because Railtrack will not have taken any of the financing or
construction risk, there is no reason why such funds should find
their way into the Regulatory Asset Base on which Railtrack is
allowed by the Regulator a certain rate of return. Alternatively,
it could be converted into a government equity holding in Railtrack.
Either way, any dividends received should pass to the SRA for
reinvestment in the railway system.

The future

22. The previous Government's stated purpose
of privatising Railtrack was so that it should have the ability
to raise large sums in the City, take the risks involved in operating
and enhancing the network, and give a return to its shareholders
commensurate with the risks taken. In addition, investment in
the infrastructure would no longer be dependent on the annual
allocation of funds from the Treasury.

23. Now we have a private sector company,
giving high returns to its shareholders, raising some, but not
enough money in the City, and taking less and less risk. Is it
going too far to suggest that Railtrack may say to the Government
if it has a financial problem at any time "pay up or the
network will get worse and worse, and you will get the political
fall-out"?

24. So what is the advantage of carrying
on like this? As in the old BR days government provides the money
for capital investment. No longer all of it, but much of it, and
the proportion grows all the time, and it takes the majority of
the implementation risk .The difference now is that the private
sector Railtrack takes a slice for itself for taking little risk
at all.

25. We understand that consideration is
being given within the sSRA, ORR and government about how tough
the Regulator can be on making Railtrack deliver its £4 billion
West Coast Main Line commitments, and concern has been expressed
that it could push Railtrack into insolvency. Such concerns have
been faced by the Regulators and regulated utilities in other
industries, and it is time that they were faced in the railway
industry. After all, the difference between private and public
sector is that the former can go into liquidation.

26. If the government decides that Railtrack
is really to operate in the private sector, then this option must
remain open, and contingency plans must be made to ensure minimum
disruption to rail services if it happens.

27. If the Government is to treat Railtrack
as if it is in the public sector, then it must take, through the
Regulator and the sSRA, a much greater control, monitoring and
auditing role than has hitherto happened, and it must also assume
responsibility for telling Railtrack what it wants done. At present,
we appear to have the worst of both worlds.

28. Alongside all this, it is time the sSRA
and the Rail Regulator pooled their resources to be able to assess
and monitor operational and engineering proposals by Railrack;
at the moment they generally take Railtrack's word for it. Most
other utility regulators have strong technical teams to monitor
and check not just on the expenditure by the utility, but whether
it is really necessary, whether there is a better way, and whether
they got value for money. It is time the regulated railway industry
was checked in the same way.

THE RAIL
REGULATOR

Railtrack's costs

29. The role of the Rail Regulator is vital
in ensuring that Railtrack performs efficiently and effectively.
His duty is to ensure that the public interest is looked after
and that "his" regulated utility performs to achieve
this in an efficient manner. Sadly, for the first few years, the
then Regulator did not pursue this function with sufficient rigour
so that now, although we have a new and by all appearances, more
active Regulator, we have lost four years.

30. Railtrack has made little inroad into
more efficient operation and, based on US experience, its costs
of maintenance and renewal are some three times those of international
best practice. The Regulator is likely to decide that Railtrack
should reduce its costs by just five per cent per annum, at which
rate it will take about 25 years to reach even today's international
best practice.

31. RFG has pointed out to the Rail Regulator
on many occasions that there needs to be independent checks operating
continuously on Railtrack, as well as checking from year to year
whether it has completed what it committed to in previous year's
Network Management Statement. This would be on the lines of the
Channel Tunnel Maitre D'Oeuvre which provided independent technical
and commercial audit of Eurotunnel and its contracts during construction
of the Channel Tunnel. Since Railtrack continue to produce its
NMS to a new format each year, it is very difficult for anyone
to check on such progress.

32. Of course, the greatest failure of successive
Regulators is to make Railtrack create and maintain a proper asset
register of what it owns. It is very difficult to debate what
should be done to change or enhance a piece of infrastructure
if one does not know what is there at the moment. We understand
that the work to create this register has now started and we look
forward to its competition and publication (see paragraphs 11-17).

33. The new Rail Regulator, Tom Winsor,
has taken a more robust view of his role but still appears to
be unwilling to confront Railtrack on matters technical. The Rail
Regulator's documentation still refers to Railtrack's costs as
if they were a "given". He is rightly seeking a more
incentive based charging regime for track access and other charges,
but progress on bringing some kind of regulation to Railtrack's
land which is adjacent or connected to rail lines is till painfully
slow.

34. The time has come to force more transparency
into a naturally secretive industry. Many transport buyers expect
this as part of their commercial negotiations and if rail freight
is to attract their custom in large numbers, it must keep up with
current business practices.

The let-out from customers' "reasonable requirements"

35. Railtrack's Licence Condition 7 requires
the company to provide for the "reasonable requirements"
of its customers. Although these have been put regularly to Railtrack,
it has frequently refused to provide any such enhancements listed
as "reasonable requirements;" because of a let-out in
this condition which says the company does not need to do the
work if this will adversely affect its financial position.

36. Over the last three years we have learned
that this let-out applies to virtually all freight projects. Railtrack
will not even provide costing or studies for enhancements unless
someone else pays for them to do so, and generally the price quoted
is unsubstantiated, as well as being subject to frequent, usually
upward, changes.

WCML Freight Strategy

37. The Regulator has tried to force Railtrack
into producing a freight strategy to demonstrate how it could
accommodate the additional 42 train paths on the West Coast Main
Line to which Railtrack committed in return for receiving the
Regulator's approval for it agreements with Virgin on PUG 2.

38. Two years after the initial agreement,
Railtrack's response in the shape of a West Coast Main Line freight
strategy was of little use in identifying whether or not the 42
paths would be available or on considering alternative routes.
It provided three route options; on the first one, using the WCML
along its whole length, it included the costs of new Silverlink
tilting passenger trains with no explanations to why freight should
pay for them.

39. On the third route option from London
to Scotland avoiding the SCML and the ECML, it provided a route
that was of little use to its customers, with grossly extended
but unspecified journey times and which does not go where the
customers want it to. Instead of using the Settle Carlisle line,
it actually uses the WCML from Carlisle to Preston, again without
any explanation.

40. We fear that the Regulator will not
enforce these contractual commitments on Railtrack, possibly for
fear of the financial consequences. If this happens, it is likely
that freight will lose outagain!

THE SHADOW
STRATEGIC RAIL
AUTHORITY

41. The sSRA has been in existence for a
year, and incorporated the Office of Passenger Franchising as
well as introducing a new freight team in order to implement the
aims of the sSRA as currently drafted in the Transport Bill.

42. From the point of view of freight, RFG
is pleased that freight now has a voice in the strategic authority
for the industry. Our concern is that the sSRA as a whole does
not yet appear to have shed the old OPRAF mantle. It does not
yet have its powers under the Bill but it has been told by Government
to act as far as possible as if it did have them, and it is on
that basis that we judge its performance to date.

43. We see it concentrating much on passenger
franchise renewal. That is to some extent inevitable, given the
timetable and necessity to improve on the sometime dire quality
some of the existing franchises. However, new passenger ideas
affect infrastructure and freight and, while welcoming new ideas
from franchisees, we are concerned that there does not seem to
be an overall strategy or plan for what the sSRA believes should
happen to passenger services as a whole.

44. It is good for it so say " we welcome
new ideas and will not constrain them unnecessarily", but
there does not appear to have been any long term policy developed
on if or how they consider the effect of any proposal on freight,
on Railtrack or on other franchises.

45. Freight almost inevitably comes last
in applying for paths since it generally does not apply for them
until a need and a customer have been identified, passenger franchises.
Franchisees generally have to reserve paths for the length of
their franchises. This will often mean that, if a franchisee proposes
to double the frequency of a service, that may well remove the
possibility of freight taking those paths in the future.

46. That would not matter if the sSRA and
the ORR ensured that Railtrack provided enhancements in capacity
and capability ahead of demand. Since this has not yet happened
except in a few isolated instances, it behoves the sSRA to come
up with a policy to deal with the competing demands of passenger
and freight.

47. On infrastructure, for reasons stated
above, there is every likelihood that the sSRA will have to fund
many of the infrastructure enhancement projects required to accommodate
the forecast growth in traffic. Unfortunately we have not seen
any comment from the sSRA about what future traffic growth figures
they might expect, and what they are working to.

48. From these growth figures should come
a strategy for enhancing the rail network to enable the additional
passenger and freight trains to operate efficiently and effectively.
We are aware that a Freight Strategy is virtually complete, but
are not aware of any similar work on the passenger network. Since
both passenger and freight services are interlinked, it seems
odd to let passenger franchises before producing a strategy for
passenger services, as is required in the Transport Bill. We hope
that the sSRA will consult on its Freight Strategy and publish
it as soon as possible.

Land

49. We are aware that the sSRA is leading
or participating in a number of regional studies on capacity but,
in the mean time, we are surprised that it has not taken a more
proactive role in ensuring that land is available for enhancements
should they be required.

50. We have had many and ongoing problems
with land holdings owned by Rail Property Ltd, some of which could
have future potential use for freight or passenger use. RPL has
resisted for years any suggestion that land for transport use
should be retained for such use and not sold off at a higher price
for commercial use as non-rail related developments. RFG and others
in the industry are making progress in identifying sites and will,
eventually seek ministerial or parliamentary approval to provide
some statutory protection for such sites.

51. It was encouraging to hear Keith Hill,
MP, Minister for Railways, state during the passage of the Transport
Bill through the House of Commons, that he could see good reasons
for looking at such land retention on a 20 year timescale. This
compares favourably with comment from the sSRA that land should
only be retained if an immediate use and purchaser could be found.
In our view, this is hardly strategic thinking.

52. Another example of lack of strategic
vision in railway property is at Gerrards Cross, where the rail
freight industry and Chiltern Trains have succeeded in persuading
Railtrack that it will have to renegotiate the agreement it inherited
from the BRB to allow Tesco to build a supermarket car park over
a tunnel to be built in the railway cutting, leaving only space
under it for two tracks. It was pointed out that this line is
the only main line leading North or West from London on which
there is any reasonable capability to enhance capacity by widening
it to four tracks. The cost of widening the tunnel to four tracks
was estimated to be small and it was encouraging that Railtrack
accepted this argument. However, we were surprised that the sSRA
refused to comment or support our stand, saying that they could
see no possibility for ever needing four tracks there.

53. We welcome the recently announced sSRA
review of the RPL land holdings, and will be responding with information
about which RPL sites should be retained. However, there is still
the need for a long-term vision from the sSRA on land holdings
and disused track-beds. In particular, the sSRA will have to reach
agreements with SUSTRANS over trackbeds sold to them by RPL. At
the time, SUSTRANS said that they would not stand in the way of
allowing any of their trackbeds to be returned to rail use. Now
they are saying that, in most cases, they must be provided with
a parallel and equally good replacement cycle route. One must
suspect that, if such parallel routes were available in the first
place, SUSTRANS would not have acquired so many miles of disused
track with such alacrity.

Network strategy

54. The WCML will be closed for 12,000 possessions
per year over the next few years, according to Railtrack's 2000
Network Management Statement. We are not told what the effect
of these closures will be on passenger or freight traffic, but
there is a need for the sSRA to be much more proactive and creative
in this area, rather than just leaving it to Railtrack, especially
when it comes to protecting the interests of freight from night-time
closures and possessions.

55. The sSRA should also be leading and/or
contributing to feasibility studies. We were surprised that the
sSRA refused to contribute to funding of a feasibility study by
Railtrack and Derbyshire Country Council into the possibility
of reopening the Buxton Matlock line, one that has potential for
both passenger and freight traffic, not only during WCML closures
but on a permanent basis.

Project implementation strategy

56. In the future, it is likely that the
SRA will be contributing large sums of money to infrastructure
enhancements, either through passenger franchises or, for freight
projects, direct to Railtrack.

57. Powers will be available for the SRA
to start this implementation process soon after Royal Assent of
the Bill, perhaps as soon as the end of this year. At that time,
subject to government funding, the SRA could instruct Railtrack
to start enhancement work on priority projects chosen by the SRA,
funded by them and which are required urgently to improve capability
or capacity.

58. The campaign group "Transport Choices
for Industrythe Rail Freight Alternative" has produced
a list of freight infrastructure projects which it believes are
necessary to be implemented within 10 years if rail freight traffic
is to double in that period. No doubt the sSRA has a similar list
of projects. The challenge is that some projects could be started
in just six months' time.

59. However, from what we can deduce:

 there has been little discussion
and consultation between Railtrack, the sSRA and the industry
over which projects should be implemented first;

 there is no information about any
plans being prepared by Railtrack which are in sufficient detail
to be funded because, even when Railtrack know which projects
to concentrate on first, there is not yet a mechanism in place
to decide which organisation funds feasibility studies;

 there is no evidence of discussion
or consultation by the sSRA and Railtrack on funding mechanisms
for projects, how they should be paid for and supervised, the
role of Special Purpose Vehicles (if any), and if and how the
Rail Regulator should be involved in regulating these enhancements;

 there would not appear to be the
necessary resources within the sSRA to create and oversee such
projects, whether this be alongside the Rail Regulator or not.

56. The consequence of this is that there
is likely to be a year or more lost before even the smaller project
gets started. We urge the sSRA to "be prepared" and
sort these problems out on an urgent basis.

RELATIONSHIPS BETWEENTHE ORR AND
SSRA

57. The relationship between the offices
of the Rail Regulator and the sSRA is crucial if the railway is
to develop its full potential in the shortest possible time. We
see a number of areas of overlap between the ORR and sSRA and,
although certain responsibilities will be transferred when the
Bill receives Royal Assent, this will not necessarily mean that
there will be a clear and harmonious relationship between these
two organisations which both have a crucial role to play. We urge
them both to work very hard together to ensure that they operate
in partnership rather than competition with each other.